Friday, December 27, 2019

A Look Inside Leonardo DiCaprio's Superyacht

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3 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff strays slightly from pure economics to analyze fuel consumption rates for boats and planes used by certain Hollywood celebrities… with plenty of reference links.

The CO Economics Correspondent randomly happened upon this story last night spotlighting actor Leonardo DiCaprio’s recent yacht vacation.

The movie star has been one of Hollywood’s most vocal proponents of climate change action, funding and starring in apocalyptic documentaries and even speaking before the United Nations:

....while never wasting a chance to lecture the hoi polloi that they need to give up their carbon-burning lifestyles and eat expensive green energy alternatives that send their standards of living a step backwards.

Meanwhile his yacht is powered by two 1,200 horsepower Cummins KTA38M2 diesel engines and the boat holds over 31,000 gallons of carbon-spewing, polar bear-exterminating, icecap-melting diesel fuel.

But hey, he poses for the press with his Fisker electric sports car so how could he not care about the planet with such eloquent virtue signaling?

Aside from the obvious hypocrisy of cruising around on a super-sized diesel-guzzling yacht while demanding the average working American's household budget be pared by expensive green electricity, electric cars, and higher taxes to subsidize it all, the equally important question comes to mind:

Does DiCaprio really think the earth is in the balance teetering towards destruction?

If DiCaprio and his ilk really believed climate change was such an ominous threat to civilization, to humankind itself... I mean really, really believed the scare stories he preaches... one would think he would retreat into a spartan lifestyle that used virtually zero carbon-based energy. After all, each mile he moves under carbon-based power edges the human race that much closer to permanent extinction, not to mention the total, irreversible destruction of entire ecosystems and countless species.

So if he really believes his own interviews, his owns speeches, his own rally sermons, and his own documentaries, why does he constantly fly around the world and spend his holidays on a 52-meter, 600+ ton yacht?

The answer is pretty obvious: DiCaprio can't possibly believe the climate change existential-threat hype. Despite all he says, his actions are totally consistent with someone who either doesn't believe it or wants to deliberately destroy the world (by his science) with mass greenhouse emissions.

But none of that has stopped the adoring media for heaping huge praise on his efforts to save the planet (sarcasm):

Incidentally in DiCaprio's defense, once enough outrage had been generated by his use of private jets, including flying 8,000 miles on one to accept an environmentalism award...

... he vowed in 2019 to fly commercial instead. But he's still burning an enormous amount of CO2 with his business class carbon footprint for vacations or to lecture others on climate change. Shouldn't he stop flying altogether if something as important as the survival of the human species is at stake?

John Travolta

Not to be left out, another notable Hollywood hypocrite (from countless numbers) is John Travolta whose backyard is a practical airport of private planes... including his own personal Boeing 737.

Granted, Travolta used to have an even less fuel-efficient Boeing 707, but his newer 737 only holds 15 passengers. With a fuel capacity of 10,470 gallons and a range of 6,640 nautical miles, his new plane burns 0.10 gallons per passenger every nautical mile carried. By contrast a commercial Boeing 737-900 burns 0.01 gallons per passenger-mile so Travolta's jet is ten times more fuel-thirsty on a per-passenger basis than flying commercial—assuming of course that he fills his plane with 15 passengers each time which he doesn't (he's on record saying he flies to destinations alone or just with wife Kelly Preston).

(the 737-MAX is even more fuel efficient than the 737-900 but given its safety problems and grounding I opted not to use it for comparison purposes).

However Travolta is at least becoming greener since his last plane, a four-engine Boeing 707-120, was an even bigger gas guzzler than his new 737. Although it seated more passengers (25), its fuel efficiency was so poor that it burned 0.19 gallons per passenger-mile, nearly twice the rate of consumption as his 737, and nearly 20 times as much as a commercial 737-900.

Of course when he flew just himself and Kelly Preston he literally burned 200 times more fuel per passenger-mile than commercial. A one-way flight from his Florida home to Washington, DC would burn about 3,200 gallons of jet fuel whereas he and his wife could fly a United 737-900 that burns 1,700 gallons on the same route (carrying over 200 passengers along the way), or they could simply drive a BMW 528 and burn 25 gallons from the service station pump.

Yet Travolta still orders fans to "do their bit" tackling climate change while contributing to environmental and climate change activist groups.

But after a barrage of outrage regarding his climate hypocrisy Travolta has been smart enough to quiet down the last few years. Shortly after the outrage he was quoted saying "I'm probably not the best candidate to ask about global warming because I fly jets. I use them as a business tool though, as others do. I think it's part of this industry – otherwise I couldn't be here doing this and I wouldn't be here now."

Yes, well as far as we know tens of millions of commercial flyers use it as a business tool too, so you and Hollywood aren't unique other than the fact that you're the ones telling everyone else to stop producing CO2.

There's no shortage of climate hypocrites beyond DiCaprio and Travolta, but for a short list just click here:

Thursday, December 12, 2019

Paul Krugman gets Ireland as Perfectly Wrong as Humanly Possible

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2 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff unearths Paul Krugman flubs, errors, and gaffes even when he’s not looking for them.

CO readers may recall last month the Cautious Optimism Economics Correspondent ran a column about the spectacular economic recovery in Ireland. It’s worth repeating that Ireland was one of the original PIIGS countries (which also included Portugal, Italy, Greece, and Spain), all of which endured double-digit unemployment after major financial and fiscal crises.

Today the other PIIGS are still suffering from 14% (Spain), 17% (Greece), and 9.5% (Italy) unemployment more than a decade after the global financial crisis, yet Ireland has achieved full employment; i.e. joblessness under 5%. And the Irish economy, ranked the freest in the Eurozone with the lowest taxes in Europe, has nearly doubled in size over the last eight years (+91%) all while slashing government spending, overall an incredible achievement.

Meanwhile over the same interval the heavily taxed and regulated Italian economy has contracted by 1%, and Greece—rated less free than even the Marxist-Leninist Communist Party governed Nepal—has shrunk by 12%.

So while searching for economic statistics for his column the Economics Correspondent stumbled across New York Times columnist and Nobel Prize-winning economist Paul Krugman’s multiple opinion pieces on Ireland from 2013. Needless to say Krugman was dead wrong (yet again) as he wrote at least three scathing columns over five months mocking Ireland’s budget austerity and economic performance:

1) “The repeated invocation of Ireland as a role model has gotten to be a sick joke.”

-“Ireland is the Success Story of the Future, and Always Will Be” (August, 2013)

2) “This is a ‘bright spot’? …True, [European economist Jean] Pisani-Ferry doesn’t actually say that Ireland is recovering, only that it is ‘set to recover’. But we’ve heard that before, and before, and before.”

-“The Neverending Irish Success Story” (May 2013)

3) “…according to the austerians, it [Ireland] should be a success story. And they keep on seizing on any bit of good news as proof that austerity is working. Now, sooner or later Ireland will recover. But guys, we’re already four years into this story.”

-“Ireland Recovers, and Recovers, and Recovers” (March 2013)

(for the record, Ireland’s austerity “story” was not four years old when Krugman wrote his column as Irish federal spending was cut from €109.2B in FY2010 to €79.7B in FY2011, and FY2011 ended in December 2011 or just fifteen months prior to his March 2013 column)

Still, Krugman's timing couldn’t have been more perfect, and he went dead silent on Ireland after 2013.

No wonder. Since Krugman’s barrage of critical articles the Irish economy has grown 91% in real terms (yes, nearly doubled) or 11.4% per year. And unemployment has fallen from 14.4% to 4.9%... ie. full employment, down nearly 10 points in six years (source: St. Louis Federal Reserve Electronic Database).

Which raises the question: can Krugman ever get anything right? I’m asking seriously.

At nearly the exact moment he decided to ridicule Ireland its economy turned straight up and grew at double-digit rates for six years. The magnitude of such a fail rivals his “stock market will never recover” call on Trump’s election night victory. It seems Krugman could do better letting a cereal box Magic 8-Ball predict the directions of national economies than applying his economics training.

However the bright spot for him is he may soon win a second Nobel Prize—this time for disproving the broken clock theory.

To read the Economics Correspondent’s original story on Ireland’s dizzying success go to:

Saturday, December 7, 2019

‘It’s ridiculous’: Gas prices spike above $4 in SF and California. $2.09 in Houston.

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead stuff recently filled the tank on his vacation rental car in Houston for $2.09/gallon en route to the airport. Upon arriving in San Francisco his Uber ride passed by several gas stations selling unleaded for well over $4.00.

Given that crude oil trades for virtually the same price across the United States—with negligible differences for oil delivered via pipeline versus rail and tankers—the correspondent challenges California progressives to explain how the nearly $2 difference per gallon can be explained by the “greed” of oil companies (if you don’t believe they’re blaming Big Oil just check out state official and reader comments in the attached story).

The sharply higher price of fuel is particularly puzzling given that both California and San Francisco are filled with selfless, caring liberals who profess to transcend and reject capitalist greed in pursuit of the altruistic common good. Plus the Golden State is rife with endless regulations that protect its consumers from price gouging by the Dark Sith Lords of the petroleum industry.

Meanwhile Texas, being the epitome of red state evil, is overrun with cold-hearted businessmen who, absent progressive regulations to rein in their lust for profit, take sadistic pleasure daily in exploiting helpless commuters in their pursuit of wanton greed and avarice.

So why does California gasoline, which should be far cheaper due to progressive pro-consumer policies, run double the price of Texas gasoline which should cost one-hundred price-gouging dollars a gallon?

Tuesday, December 3, 2019

The Economics of Healthcare in America #3: Why Are Pre-Existing Conditions Even a Problem? (Part 2 of 4)

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4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff looks at tax policy proposals to end the pre-existing conditions insurance coverage problem— starting with two noble but faulty plans that have little chance of either working or passing through Congress.

“The tax deduction should go to the individual, not the employer… Until the government removes the double tax deduction that encourages employers to provide insurance—not to mention the mandates forcing them to do so—corporations will retain the real leverage in healthcare finance. Only when the individual wields the power of the purse will his needs come first.”

-Myron Magnet,
 “The Original Mistake That Distorted the Health Insurance System in America”
  (Los Angeles Times op-ed)

If you aren’t familiar with the history and economics of the health insurance tax deduction, the Economics Correspondent strongly recommends reading Part 1 of this installment via the following URL. (it’s impossible to understand the needlessness or cause of the pre-existing conditions crisis without it)

In 1943 the federal government made employer-paid health insurance a tax-deductible business expense, and in doing so instantly created the pre-existing conditions problem that still plagues us today.

This is no secret to economists and health policy wonks. It’s been acknowledged as a decision fraught with bad consequences for decades. America’s government-constructed dependence on employers for health insurance has been referred to as “insane” by many policy analysts and for good reason. Even some politicians who publicly browbeat about the evils of greedy health insurers and drug companies privately know that the pre-existing conditions problem has been largely created by perverse government-engineered incentives.

(Hillary Clinton is an example of an intelligent politician who understands the core problem yet chooses instead to publicly blame big insurance companies for not covering pre-existing conditions)

Subsequently, a great deal of discussion in academia, think tanks, and Washington has focused on how to undo the “job dependency” problem, but most can be quickly deemed unworkable with just a little analysis.


One proposal, offered mostly by Congressional Republicans, has been to simply give individual health insurance premiums the same tax-deductible status as employer-sponsored health insurance. “Why not level the playing field and put both individual and employer health insurance at the same level?” they ask. And in fact Obamacare has allowed very low income households to write off a fraction of their healthcare premiums but only for plans purchased within the lousy government exchanges (the so-called Premium Tax Credit or PTC).

Unfortunately neither the PTC nor the proposed wider tax break for individual insurance premiums will solve the pre-existing conditions problem.

Why? Because even with the tax break, the moment a business offers a job with free or, in the 21st century, heavily subsidized and hence still cheaper health insurance, workers will still drop their “at cost” individual plans to hop on board with their employer-based plan. Why wouldn’t they? It’s a perfectly rational decision that saves them a lot of money.

Of course the moment they make the switch to save money, they instantly subject themselves to the vulnerability of losing their insurance if they lose their job, and if they’re sick at the same time no other insurer will pick them up.

(note: The COCEA acknowledges the existence of COBRA legislation that requires employers to offer continuous health benefits for several months after employment ends, but COBRA is extremely expensive and has a short shelf-life, thus falling far short of a real solution and even then still had to be forced through by law).


Another proposal, suggested by Milton Friedman near the end of his life, was to simply repeal the tax credit that caused the problem in the first place. In other words, just take away the tax credit for employer-sponsored health insurance. The theory was that without the enticement of free or near-free medical coverage at work, people would naturally move back towards buying their insurance on the individual market where they would be covered continuously regardless of employment status.

While this outcome is quite probable, in fact nearly certain, it’s unworkable in reality because it underestimates the political consequences that make it a nonstarter.

Health insurance remains extremely expensive in America. If any politician stood up and told Americans “we’re ending your free/near-free employer health insurance and you now have to pay for it all yourself” there would be proverbial riots in the streets regardless of the long-term continuity benefits.

Consider a working parent paying $400 a month for an employer-subsidized policy that covers a family of four. With the repeal of the tax credit that worker loses their coverage at work and “goes it alone” on the open market finding a plan that costs $1,500 without employer subsidies. Even with a nice tax credit, the cost increase would squeeze households so badly that many would simply have to go without.

Americans have become so used to getting their health insurance cheaper at work that trying to get them off it is political suicide. Any doubts can be dispelled by imagining any Republican candidate for office making such a proposal and being slammed by his/her Democratic challenger (with plenty of help from the press) that “my opponent wants to take away your workplace healthcare and force you to pay tens of thousands of dollars a year more… all to line the pockets of big business and greedy insurance companies.”

Much to the frustration of knowledgeable policy wonks, the employer insurance tax credit is a problem much like a fishing hook: easy to dig into the public but extremely painful to remove.

However in Part 3 we’ll discuss the innovative proposal that actually can solve the pre-existing conditions problem and find acceptance with enough politicians to have a chance, at least in a Republican controlled Congress.

Friday, November 22, 2019

The Economics of Healthcare in America #3: Why Are Pre-Existing Conditions Even a Problem? (Hint: they weren’t until FDR made them one in 1943-Part 1 of 4)

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6 MIN READ - The Cautious Economics Correspondent for Economic Affairs and Other Egghead Stuff resumes his series on the economics of healthcare in America.

Prologue note: The Economics Correspondent does not find great satisfaction and interest in studying the subject of American healthcare economics. Although the industry and its perverse outcomes are heavily the consequence of thousands of government laws that distort pricing, consumer, and provider incentives, the Correspondent tends to specialize primarily—albeit not exclusively—in monetary and banking history, monetary policy, and the history of business cycles.

Nevertheless, U.S. medicine is in crisis right now—just as it has been for decades. And most Americans are fairly clueless about the cause, because the root cause can’t be fit into a soundbite like “single payer now!” or “let insurance companies compete across state lines” or “We’re the only industrialized country in the world without socialized medicine.”

Liberal progressives want government run medicine or nothing. Conservatives distrust handing over their healthcare to the government bureaucracy, but often have difficulty articulating why American medicine is so wrought with inflation, leaving it for others to assume it must be the result of the flawed free market (it's not, not by a long shot)..

Thus I feel it necessary to continue the series on Healthcare Economics, starting with understanding, and then fixing, the pre-existing conditions coverage problem.


Pre-existing conditions is a healthcare issue that’s been heavily discussed in the last few years. The cruelly named Patient Protection and Affordable Care Act (ie. Obamacare) claimed to finally solve the longstanding problem by simply prohibiting insurance companies from denying enrollees who had undergone treatment for a medical condition in the previous twelve months.

Then a white elephant commitment to preserve that clause sank President Donald Trump’s attempts to repeal Obamacare when moderate Senate Republicans refused to support any bill that removed the pre-existing conditions protection while Congressional Freedom Caucus members refused to vote for any bill that retained it. Hence even with a Senate majority Republicans couldn't muster the votes for repeal.

Yet today’s familiar problem of insurance denials due to pre-existing conditions never had to exist in the first place, didn’t exist before World War II, and can be solved without the heavy handed mandates of Obamacare. In fact the Obamacare pre-existing protections "solution" has made healthcare far more expensive--acting as a major contributor to skyrocketing insurance premiums that have decimated household budgets since its enactment.

What did the health insurance system look like when pre-existing conditions weren’t a common problem? Why did it change for the worse? And how can it be fixed with far fewer market interventions that actually reduce cost instead of inflating it?

To understand we first have to go back to a time when there was no such thing as a pre-existing conditions crisis.


In the 1930’s and early 1940’s health insurance was a small, immature, but growing industry. Although direct payments for most medical services were very low—a trend that would succumb to steady price inflation beginning with the enactment of Medicare and Medicaid in 1965—millions of Americans were nevertheless already insuring themselves against major medical expenses buying plans through “The Blues” (Blue Cross and Blue Shield) or medical cooperatives where a monthly fee was paid to an association of doctors and/or hospitals in exchange for services when needed.

A key distinction of health insurance during this period is that individuals overwhelmingly shopped the insurance market and purchased their coverage directly. Employers were almost never buyers of insurance, much the same way employers don’t provide workers car insurance today, or homeowners insurance, or renters insurance, liability insurance, boatowners… etc.

But today health insurance premiums are paid very differently, dominantly funded by employers—not individuals—in an arrangement that started in the mid-20th century. Why the dramatic shift?

The answer lies in World War II government policy.

During the war, the federal government turned to Federal Reserve monetary expansion and inflation to fund enormous military expenditures. The predictable result: prices and wages rose rapidly. And as is frequently the case, government officials clamped down by imposing price and wage controls.

Given the extremely low unemployment rate, businesses tried to lure potential new workers from outside the labor force or from other employers, but wage controls prevented them from offering higher wages as an incentive.

Industry leaders complained and President Franklin Roosevelt, himself looking to ever-expand military production, offered a compromise.

In a seemingly small and insignificant edict, Roosevelt ordered the Internal Revenue Service to classify employer-sponsored health insurance premiums as both a tax-free business expense and employee pre-tax benefit.

Businesses may not have been able to offer higher wages due to price controls, but FDR allowed them to deduct any health insurance they bought on behalf of the employee from their corporate tax bill.

This tax deduction lives on to this day as any employee can attest when looking at his paycheck stub. Health insurance benefits are paid pre-tax, and companies deduct the cost of insurance premiums as an operating expense.

The health insurance tax credit was instantly popular with both employers and workers. Even if there had been no price controls at all, employers calculated that an additional dollar in salary would be whittled down by taxes to only 65 or 75 cents for workers. But an employer could offer a dollar in health insurance premiums and the employee would receive the full one hundred cents in benefits.

For the employee, corporate-paid health insurance was attractive because it made a service they originally paid for out of pocket virtually free (although in the face of spiraling post-1965 price inflation, companies have insisted employees contribute a minority amount).

Previously on the open individual market workers had bought insurance with their own after-tax money, but now they could get health coverage nearly free at work. Great, or so they thought...

Incidentally, employers continue to receive a tax credit for health insurance benefits even today while health insurance purchased directly by individuals still doesn’t qualify for a tax-deduction (with a few rare exceptions).


In hindsight the unintended consequence of the government’s encouragement of employer-paid health insurance is quite clear. Millions of Americans who had previously bought their health insurance directly on the open market made the economically rational decision to drop their old plans and switch to nearly free employer-sponsored health plans.

Tens of millions more Americans signed up for employer-sponsored health insurance into the 1950’s and 1960’s. By the 1970’s and 1980’s, an expectation of employer health insurance had become so rooted in the American mindset that job candidates now automatically demanded health insurance coverage during hiring interviews.

Unfortunately the same expectation is so ingrained in worker mentality that few ask why businesses are supposed to be providing us health insurance at all. No one expects their employer to provide car insurance, homeowners insurance, renters insurance, etc…

Well the unintended consequence has been far-reaching. Unbeknownst to workers, employers, and possibly even government officials, the curse of pre-existing conditions was born overnight with the 1943 change in tax policy.

How you ask?

Consider other insurance plans you purchase directly on the open market—say, car insurance. You don’t rely on your employer to pay for car insurance nor do you expect it. You shop around, sign up with an auto insurer like State Farm or Allstate, and so long as you’re happy with their coverage/service, you keep paying your annual or biannual premiums—regardless of whether you or your spouse are employed or not.

The same arrangement existed in health insurance until 1943. No matter who you worked for—regardless of whether you even worked or not—you always had the same health plan because your relationship with your insurer had nothing to do with your job status.

But when the employer insurance tax credit was introduced, millions of Americans immediately dropped their perfectly good and uninterrupted (uninterrupted being the vital trait here) plans to sign up with their employers instead.

And in the blink of an eye Americans opened themselves up to a pre-existing conditions conundrum. Because if you lost your job, you lost your health coverage. Worse yet, if you lost your job because you got sick, you lost your health coverage right when you needed it most.

Imagine getting cancer and a month later being laid off, losing your employer health plan, and only then trying to buy a new policy on the direct individual market. The new insurer is understandably going to reject your application given that you’ve never paid a dollar in premiums but have a pre-existing cancer problem that is going to instantly cost them hundreds of thousands of dollars in new claims.

If Americans had continued to buy health insurance on the individual market as before—divorced from their employment status—getting cancer and losing a job wouldn’t present a continuity problem. Their individual insurance policy would pay for treatment while they searched for another job.

But continuity in health coverage died the moment the federal government placed a tax benefit on employer-provided health plans and enticed Americans to break that coherence (the same coherence they still enjoy today with car insurance or homeowners insurance). Overnight Americans became completely dependent on their job for medical coverage—ie. vulnerable to a badly timed job loss.

Thus with the stroke of the good-intentions pen the federal government created the scourge of the pre-existing conditions problem in 1943.

Free market economists and libertarians have often lauded every tax break that comes their way. Milton Friedman famously said “I never met a tax cut I didn’t like.” But the employer-provided health insurance tax credit story proves that some tax cuts can be harmful—particularly those that encourage people to make irrational and harmful decisions. Imagine a government tax credit to buy heroin, syringes, and provide documents to prove narcotic injections were administered to at least 100 grade school students each day.

In the words of many free-market leaning economists and even non-ideological health care policy experts, America’s current system of employer-based health insurance is an “insane” way to administer medicine. And it is, the outcome of an accident that needs to be reversed if we're to solve the pre-existing conditions problem that plagues so many hard-working Americans.

In the next installments we’ll discuss documented proposals to break America’s irrational dependence on employers for health insurance—most of which are probably unworkable for economic and/or political reasons—and one innovative solution that can actually solve the pre-existing conditions problem and find acceptance among enough politicians to have a chance of passing, at least in a Republican controlled Congress.

(click below for a brief corroborating history of the World War II provisional tax policy change encouraging employers to provide health insurance for workers)

Friday, November 1, 2019

Epilogue to a Primer on Negative Interest Rates: Europe Doesn’t Need Negative Interest Rates. Just Ask the Beautiful PIIG

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff asserts radical negative interest rate policy is completely needless in Europe or anywhere else.

Just this September the European Central Bank pushed its already abnormal “deposit rate” down further to minus 0.5%. ECB officials cited continued sluggish growth and stubborn unemployment, particularly in the PIIGS countries, hence the need for even more aggressive measures.

Yet despite employing over a decade of interventionist medicines—historic quantitative easing, massive government stimulus spending, and radically negative interest rates—ECB officials and mainstream New Keynesian economists are still scratching their heads wondering why sluggishness has persisted into its second decade after the financial crisis.

Spain’s unemployment rate, once 26.3%, has improved to “only” 14%.

Greece’s, once 27.8%, has fallen to “only” 17%.

Italy’s jobless rate remains 9.7%. Portugal has done better at 6.2%, but eleven years removed from the crisis is still at what would be considered recession levels.

Even France, a core Eurozone state that was never officially a PIIG, has only reduced its jobless rate modestly from 10.6% to 8.5% over this decade-plus long saga.

These are Great Depression-level timespans and, in the case of Greece and Spain, Great Depression unemployment levels. So unsurprisingly the intractable and lethargic state of the continent’s periphery continues to make headlines in Europe and even in the United States.

And central bank officials, unable or unwilling to find an explanation, go back to the proverbial definition of insanity: more of the same. In their eyes governments "still aren’t spending enough,” or the central bank "needs to engage in even larger asset purchases,” and “negative interest rates need to be pushed down even lower.”

This is all nonsense. And the evidence that it’s nonsense has been right under their noses for years.

Noticeably absent from the headlines for several years now is the vigorous full recovery in Ireland, itself once a PIIGS member.


In 2008 Ireland suffered its own banking crisis and deep recession. Its institutions required massive and controversial government bailouts. For a single year (2010) the Irish government’s budget spiked due to a major rescue package to recapitalize the banking system.

But the following year, with distressed banks shored up, the Irish government launched the policy reversal that central bankers, Keynesian economists like Paul Krugman and Joseph Stiglitz, and major news outlets like the New York Times and Washington Post warned would plunge the country into a Great Depression:

True budget austerity—slashing fiscal spending and keeping it that way for a decade, and without huge tax increases.

Irish government spending in euros:

2009: 80.0B
2010: 109.2B (bank bailouts)
2011: 79.7B
2012: 73.7B
2013: 72.6B
2014: 73.1B
2015: 76.0B
2016: 75.4B
2017: 77.5B
2018: 82.2B (-24.2% from 2010)

(source: Eurostat)

But instead of the Great Celtic Economic Collapse predicted by Krugman, et al. the Irish economy has thrived, quietly reaching full employment while PIIGS members Italy, Portugal, and Spain are still spending much more today than they were in 2009 with tax increases across the board. Greece is the one exception, finally forced to give up “pensions-at-55-for-all” in exchange for conditional bailout loans and guarantees from the so-called European “troika,” but it also hiked taxes sharply.

Unemployment rate (all numbers Q1):

2011: 15.6%
2014: 27.0% (peak)
2019: 18.4%

2011: 8.0%
2014: 12.9% (peak)
2019: 10.5%

2011: 13.0%
2013: 18.4% (peak)
2019: 7.0%

2011: 20.6%
2013: 26.5% (peak)
2019: 14.3%

2011: 15.5%
2012: 16.3% (peak)
2019: 5.2%

(source: St. Louis Federal Reserve Economic Database)

(July 2019 story: Ireland at full employment - 4.5% unemployment)

OK, so Ireland is enjoying full employment while most PIIGS are still stuck in double-digit joblessness. But what about economic growth?

Looking at GDP the contrast is even more striking.

Annualized GDP growth rates (2011-2019, not seasonally adjusted):

Greece: -1.6%
Italy: -0.1%
Portugal: +0.6%
Spain: +1.2%
Ireland: +7.1%

(source: St. Louis Federal Reserve Economic Database)

Keep in mind these are annualized averages. 7.1% growth a year for eight years is prodigious—a 73% advance in well under a decade. In the same eight years Italy has contracted by 1% and Greece by 12.1%

There’s more. Ireland’s nominal per-capita GDP last year was $76,100.

That’s no typo. $76,100.

To put $76,100 in perspective, that’s slightly higher than the United States’ $62,600, and almost 80% higher than the United Kingdom’s $42,600 (source: IMF).

That’s right, the Irish—treated like the doormats of Britain for centuries by the English—are now the richer of the two by far.

Yet during the entire 2009-2019 period the ECB argued PIIGS economic malaise required lower and lower interest rates, going into negative territory. Even when the ECB deposit rate dipped under zero to -0.1% from 2012 to 2015, the central bank said it wasn't enough.

But when the ECB dropped rates again to -0.4% in early 2016, Ireland’s economy had already been growing rapidly and joblessness plunging. It was only the other PIIGS who remained stuck in neutral.

Clearly Ireland didn’t need radical, negative interest rates. And it didn’t need massive government deficit spending. Defying all the Keynesian orthodoxy Ireland was growing like gangbusters.


What was Ireland doing differently? And why have the ECB and the media been so quiet about Ireland?

The answer to both questions is the same: Ireland has employed by far the most free-market economic policies in the Eurozone and the second-most free-market policies in all of Europe (second only to bellwether Switzerland).

Ireland has only modestly intrusive labor laws and wages are more flexible than in most European countries. Unlike on the continent where governments make it extremely difficult, extremely expensive, or even impossible to fire even the most unproductive workers, “at will” work relations are much more common in Ireland. For example, the Irish government doesn’t back unions to nearly the same degree as other PIIGS and doesn’t tolerate violent worker riots every time they don’t like a new labor contract. You can bet workers don’t kidnap factory bosses and hold them hostage as is the norm in France.

The Irish government doesn’t promise pensioners they can lie on the beach the rest of their lives at age 55. The regulatory environment is much less strict. Tariffs are very low, and foreign investment is encouraged, not assaulted for the sin of “profit.”

And Irish taxes and government spending as a percent of GDP are among the lowest in Europe (22.8% of GDP versus the European average of 36%: 2016), as is its corporate tax rate which defines Europe’s floor at only 12.5%. Many European and even North American corporations have fled to Ireland for tax relief although the recent U.S. corporate tax cut from a top rate of 35% to 21% has stopped that trend.

Nevertheless, Ireland is a tax and regulatory haven, including income taxes which are comparable to those in the United States and much lower than the rest of Europe.

Therefore it should be no surprise that Ireland was ranked the world’s 9th freest economy in the 2017 Heritage Index of Economic Freedom, trailing only longtime leaders Hong Kong, Singapore, Switzerland, New Zealand, etc. It ranked 2nd freest in Europe, and 1st freest in the Eurozone.

Meanwhile the other PIIGS—Spain, Portugal, and Italy—placed far down the rankings at 70th, 77th, and 78th.

Greece rated an abysmal 127th, behind Guatemala, Honduras, Uganda, Burkino Faso, Senegal, and even Nepal which is governed by the Unified Marxist-Leninist Communist Party.

Is it a coincidence that a PIIGS country ranked less economically free than Communist Nepal has been the basketcase of Europe for over a decade?

Incidentally Ireland also rated nine spots above the United States (18th) which was at its lowest rank ever following two terms of the outgoing Obama administration’s ballooning regulations and government spending.

However the USA has regained several places in 2019 rising to 12th after the Trump administration’s deregulatory push, tax cuts, and reversal of many Obama-era controls and mandates. Ireland has also climbed to #6.

The remaining PIIGS still languish in 57th, 62nd, 80th, and 106th place.

Given the stark contrast between Ireland’s success and the other PIIGS’ failures, and the parallel contrast between Ireland’s accommodative business environment and the PIIGS’ traditional socialist interventions, it’s no wonder both the media and European policymakers have been nearly silent on the Irish recovery.

If they acknowledged that Ireland has found the key to growth—free markets, lower taxes, less government spending, and a more capitalistic environment—they would have to admit that negative interest rates are a needless ploy and that the real problem in Europe is the heavy hand of government taxation and regulations.

After all, interest rates in the United States have been positive throughout the last decade (albeit very close to zero from late 2008 to 2015) and its economy has vastly outperformed the PIIGS and other anchor countries like France, Denmark, and Sweden (although the latter two are not euro participants).

Since the massive deregulatory and tax relief pushes of the Trump administration began in 2017, the U.S. economy has become the envy of the developed world and outperformed vaunted Germany with a two-year GDP growth rate of 2.8% vs 1%, even as the Federal Reserve has aggressively hiked interest rates.

Meanwhile as negative rates distract from the real structural reforms needed in Europe, they also introduce enormous risks. Negative yielding bonds entice governments to go on bigger and bigger borrowing binges and a continent awash in ultra-cheap money risks reinflating dangerous asset bubbles across the continent…

…and the Swedish housing bubble that already began deflating in 2018:

Note: Sweden doesn’t allow zero-down loans and hasn’t forced lenders to make widespread loans to uncreditworthy borrowers, so its financial system may withstand the downturn better than the U.S. did in 2008.

So instead of looking for more ways to regulate the economy from the commanding heights, or force down interest rates further into unnatural negative territory, perhaps the ECB and European governments should look beyond the continent to the British Isles. The formula for Ireland has been deregulation, low taxes, flexible labor markets, and freer markets in general.

And that formula has emphatically worked. The evidence is right in their backyard.

It’s time for them and the media to end the news blackout.

Tuesday, October 22, 2019

A Primer on Negative Interest Rates (Part 3): The War on Cash

Click here to read the original Cautious Optimism Facebook post with comments

8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff examines multiple worrisome proposals by central bankers to outlaw paper currency.

“It [negative interest rate policy] could take years… … if that means for a while savers have to eat their capital to survive, then so be it.”

-Willem Buiter, former Chief International Economist at Citigroup and negative interest rate enthusiast

The Economics Correspondent urges CO readers to watch the attached three-minute video interview in which Buiter articulates masterfully New Keynesian rationales and weapons for declaring war on cash and ultimately banning its existence entirely.  Translations follow below.


In Part 2 of this monetary economics series, we summarized the repercussions of negative interest rate policy in continental Europe. Just as policymakers intended, negative rates have inflated demand for government bonds thus making borrowing cheaper (in fact most European sovereign debt yields have gone negative), and commercial banks have been forced to take bigger lending risks while also passing on their costs in the form of negative rates imposed on their customers: specifically wealthy clients and corporations.

In fact, forcing bank customers to eat negative rates was a primary policy objective from the beginning, since demand-side theories require not only banks to expand lending, but also for companies and consumers to spend more.

In economics jargon “aggregate demand must be boosted to equal aggregate supply,” one of the foundational tenets of New Keynesian theory. And when faced with the prospect of their bank account balances losing 0.4% or 0.5% in value every year, consumers and companies are more likely to handle money like a hot potato and spend it quickly.

Rapid turnover of euro balances also raises monetary velocity and drives higher inflation, another of the ECB’s policy goals.

However policymakers have only achieved their objective against two of three targets: wealthy individuals and corporations. The third target, smaller retail depositors, remains elusive. Everyday bank customers may hold smaller balances and spend less than wealthy ones, but as a group there are so many of them that their collective wealth represents an untapped sea of funds that central bankers and technocrats are just aching to make them spend.

Unfortunately for the technocrats, it’s currently impossible to compel small depositors to spend more with negative interest rates since they can always avoid the negative rate by closing their accounts and converting their deposit balances into cash.

Wealthy bank clients and corporations can theoretically convert their balances to cash as well, but rarely do due to the sheer cost and risks associated with physically holding so much paper currency. And in the case of companies the massive inconvenience of making/receiving payments with employees, creditors, suppliers, vendors, etc… exclusively with cash.

Central banks and commercial banks were aware of these limitations long ago and always knew that wealthy individuals and companies would tolerate a mildly negative interest rate so long as the penalty remains lower than the cost of storing a lot of currency.

But small depositors are different. A bank customer with, say, a $3,000 balance doesn’t have to accept negative interest rates sitting down. He can close his account and withdraw cash which pays a superior yield of zero percent. $3,000 in notes doesn’t require a lot of space to stockpile—hence virtually zero cost—and most everyday transactions for the average consumer can be handled with cash.

Ironically, if central bankers and commercial banks actually attempted to impose negative rates on small customers, the mass cash withdrawals would result in a reduction of loanable reserves, credit would become more scarce, the money supply would contract, and inflation would reverse into deflation: all producing the opposite result from what policymakers had intended.


Not to be discouraged, central bankers and New Keynesian academics have been hard at work devising strategies to deny bank customers the cash option. In what has been dubbed “the war on cash” politicians, central bankers, and economists the world over have written multiple proposals for eliminating currency and banknotes. The recommendations range from phasing out large denomination notes only, thus raising the cost of storing a larger number of smaller denomination bills, to outlawing cash altogether.

Whatever proposals might be enacted in the future, once policymakers are satisfied they have sufficiently removed the everyday consumer’s cash option, they’ll reduce negative rates even further until private banks pass on the negative rate to even their smallest retail customers. Why not? Small depositors will no longer be able to flee into cash.

In case you think this is black helicopter conspiracy talk, or that “war on cash” proponents are powerless upstarts, think again. In 2015, a meeting of negative interest rate/war on cash economists and policymakers was held at the “Removing the Zero Lower Bound” conference in London to share strategies for pushing interest rates even further below zero.

Banning paper currency was a hot topic of discussion among the dignitaries representing:

-Harvard University
-Princeton University
-Carnegie-Mellon University
-University of Michigan
-Florida State University
-London School of Economics
-Imperial College of London
-The U.S. Federal Reserve System
-The European Central Bank
-The Swiss National Bank
-The Danmarks Nationalbank
-The Swedish Finance Ministry
-The Bank of England (retired)
-The Center for Economic Policy Research
-Generali France, S.A.
-Brevan Howard Asset Management
-Soros Investment Fund

Among the most eloquent champions of the war on cash was Willem Buiter, the then-Chief International Economist at Citigroup. His short interview from 0:34 to 3:18 summarizes perfectly the rationale, objectives, and weapons that zero lower bounders plan to employ against paper currency.

If the economics jargon is too difficult to follow, the Economics Correspondent has included translations below:

1) “The existence (inaudible) of currency of cash sets the lower bound of policy rates.”

Translation: The public's fondness of cash limits what we as policymakers can force them to do.

2) “Since currency is the culprit—cash—get rid of currency. Offer every man, woman, and child an account guaranteed by the central bank that cash currently does but allows negative interest rates to be set.”

Translation: Force consumers to surrender their already crummy central bank notes and drive them into an even crummier account that can be fully manipulated by central bankers. Buiter then addresses “dealing with the problem of the poor and ill” by generously “allowing” small denominations to exist.

3) “To tax currency… …require people to present currency once a year… …at the central bank or a branch office and have it stamped and give five pennies for every pound.”

But Buiter then squirms that “that’s kind of intrusive.”

Why is he worried about intrusion now?

Answer: “You have to enforce it.”

Oh, for a moment I was na├»ve enough to believe he might consider compelling the common folk to surrender their cash and eat negative interest rates “intrusive” too, but... never mind.

4) Buiter really turns up the heat at 1:56. His third solution is “To keep currency, but to end the fixed exchange rates, one-for-one, between currency and deposits.”

Translation: We central planners will still magnanimously permit you to use cash, but the central bank will charge you a large penalty every time you withdraw it from your bank. Once that penalty exceeds a high enough pain threshold, you will be rightfully deterred from using cash altogether and leave your money in the bank—subject to the negative interest rate we can then force you to eat with impunity.

5) At 2:56 Buiter incredulously claims “There is no right or wrong level of interest rate. The question is what level of interest rate is necessary to get aggregate demand to equal aggregate supply and create full employment.”

This is just more erroneous New Keynesian theory, only upgraded: with unlimited compulsion by the State to shepherd people and their money like cows into whatever cattle car they think—in their enlightened wisdom—is best for them.

His credo of “no right or wrong level of interest rate” harkens back to Nixon-era price controllers who saw no right or wrong price of gasoline either, thus clearing the way to force prices down arbitrarily and create shortages and an energy crisis. Or Venezuelan Chavistas who decided the “right” price was whatever they dictated, emptying store shelves of basic commodities. Or Zimbabwe’s central bankers who decided there was no right or wrong interest rate when they manufactured a giant hyperinflation a few short years ago.

6) And of course “If this means savers have to eat their capital to survive, so be it.”

How casually he unilaterally judges (like a eugenicist) who will be allowed to sustain themselves and how.

If you’re fascinated by this intellectual arrogance which economist F.A. Hayek dubbed “The Fatal Conceit,” there’s more from crusty Charles Goodhart, a former Bank of England Monetary Policy Committee member (equivalent to Federal Open Market Committee member at the Federal Reserve):

Goodhart touches on a favorite rationalization by zero lower bounders for phasing out high denomination notes: they’re used disproportionately by criminals, tax evaders, and money launderers. Harvard economist and former IMF Chief Economist Ken Rogoff also uses this excuse in his famous book “The Curse of Cash” to inch closer to their shared goal of unrestricted negative interest rates thrust upon the masses.

However, in a recent debate with Rogoff, George Mason University economist Lawrence H. White argued that many things are disproportionately used by criminals, tax evaders, and money launders—such as fast cars, fast boats, flashlights, and dark clothing. Also the Fourth and Fifth Amendments of the U.S. Constitution. Should we outlaw them too?


Rogoff has recommended phasing out the one-hundred dollar bill as a starting point for eliminating high denomination notes. Incidentally, a twenty dollar bill in 1975 had the same purchasing power of $100 today, so Rogoff is effectively arguing that the equivalent of the twenty in 1975 should be banned.

However, Rogoff and his like-minded colleagues still claim to care about our freedoms and he pleads "I view this as a balance between your right to privacy, an individual’s right to privacy, and society’s right to regulate, collect taxes, etc..”

Yet this promise that “giving up one more right will yield the ideal balance between regulating crime and the business cycle and preserving your freedom” has been invoked repeatedly over the last century, only to lead to another major crash and petitions to repeal additional freedoms.

For example:

-In 1914 the architects of the Federal Reserve argued “Just let us force commercial banks to centralize all your (bank customers') gold reserves at our district banks and there will never be another boom-bust business cycle. Your monetary freedoms shall not be further infringed.”

The Depression of 1920-21, the second worst of the 20th century, struck six years later.

-Shortly afterwards the Federal Reserve and Congress argued “Just let us make commercial bank notes illegal and replace them with a central bank monopoly, and there will never be another major recession. Your monetary freedoms shall not be further infringed.”

-In 1925, the Bank of England argued “Just let us take away your legal right to redeem your cash into small gold coins, and allow you only to redeem in 400-ounce bullion bars (worth $500,000 at today’s gold price, practically irredeemable for all but the wealthiest depositors) and we can manage the economy into Utopian prosperity. Your monetary freedoms shall not be further infringed.”

The Great Depression struck four years later.

-After the Fed inflated the stock market and real estate bubbles of 1927-29, and then failed miserably to do the very job it was created to do during the 1929-33 crash, President Franklin D. Roosevelt argued “Just let us take away your legal and contractual right to redeem currency into gold and there will never again be bubbles, busts, or deep economic slumps. Your monetary freedoms shall not be further infringed.”

The Depression of 1937-38 followed four years later, the third worst downturn of the 20th century. From trough to peak, unemployment rose from 11% to 20% in just nine months.

-In 1971 Richard Nixon argued “Just let us delink the dollar from gold completely, even for international holders, end fixed exchange rates, and the economy can be fine-tuned by technocrats into perpetual moderation. Your monetary freedoms shall not be further infringed.” Twelve years later interest rates were 21% and unemployment was 11%.

-In 1971 the Federal Reserve argued “Just let us expropriate the value of your money a little faster with higher inflation and recessions will be ended and the business cycle solved.” Twelve years later the dollar was worth 38 cents and America was on its third recession.

-And now in 2019 the zero lower bounders are arguing “Just let us take away your ability to conduct commerce with paper money altogether, and there will be economic growth marking the end of deep recessions and sluggish recoveries. Your monetary freedoms shall not be further infringed.”

Why should anyone believe either claim today? That this is the last freedom they will ever erase, and that banning cash is the only policy tool they need to end bubbles, end financial crises, end deep recessions, and in case of any future recession, guarantee rapid and vigorous recovery forever? All those promises were already made during the founding of the Federal Reserve in 1914.

The western world has gone from private, competitive commercial bank note issuance redeemable in specie to a central bank monopoly of irredeemable paper, perpetual inflation, exchange rate manipulation, and soon the criminalization of cash completely.

What has the subsequent track record of the monetary central planners been? Have they kept their promises to end the economic boom-bust cycle forever, and forever abstain from contravening the public’s freedoms?